Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Suzhou HYC Technology Co.,Ltd. (SHSE:688001) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Suzhou HYC TechnologyLtd

How Much Debt Does Suzhou HYC TechnologyLtd Carry?

As you can see below, at the end of March 2022, Suzhou HYC TechnologyLtd had CN¥727.2m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥1.63b in cash offsetting this, leading to net cash of CN¥899.8m.

How Strong Is Suzhou HYC TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Suzhou HYC TechnologyLtd had liabilities of CN¥761.2m due within a year, and liabilities of CN¥776.0m falling due after that. Offsetting this, it had CN¥1.63b in cash and CN¥1.08b in receivables that were due within 12 months. So it actually has CN¥1.17b more liquid assets than total liabilities.

This surplus suggests that Suzhou HYC TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Suzhou HYC TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Suzhou HYC TechnologyLtd grew its EBIT by 17% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Suzhou HYC TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Suzhou HYC TechnologyLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Suzhou HYC TechnologyLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Suzhou HYC TechnologyLtd has net cash of CN¥899.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 17% year-on-year EBIT growth. So we are not troubled with Suzhou HYC TechnologyLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Suzhou HYC TechnologyLtd you should be aware of, and 1 of them doesn't sit too well with us.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.